The Complicated Economics of a Postal Increase

The cost of a stamp has increased from 34 cents in 2001 to, if approved, 46 cents in 2011.

Bloomberg News

Stamp prices may be rising again.

So what are the changing economics of the postal stamp increases? Turns out, the answer is pretty complicated, according to Maura Robinson, the Postal Service’s vice president of pricing.

“Our market has substantially changed in the last two to three years,” Ms. Robinson says.

The situation is even more perplexing when you consider that in general the post office is legally barred from increasing the price of stamps beyond inflation. Right now, Ms. Robinson says, that cap is around 0.6%, a little lower than the current consumer price index because the Postal Regulatory Commission uses a special formula on the moving average, so it tends to lag.

In special circumstances like these, the postal service is allowed to request an additional permission for a special increase, like the one that would go into effect in January. If the Postal Service can demonstrate that exceptional circumstances to the Commission, the increase could be approved. Even with stamps going as high as 46 cents, it still might not make sense to invest in those Forever stamps, which are still available.

Part of what’s driving the Postal Service financial crisis is a simple decline in business. Your lack of junk mail from banks is a huge loss to mail carriers. And not just junk mail, but paper trails from realtors, retailers, and credit cards have also dropped. A lot of the costs companies face in mailing statements aren’t just wrapped up in stamp prices, but tied with printing and backend billing costs, and among the first to be revamped when it’s time to slim down a budget.

In the last two years, mail volume has fallen off a cliff, decreasing 20%. That’s the biggest decline than the Postal Service has seen since 1933, Mrs. Robinson says. Even then, volume plunged 17%. Commercial mail makes up about 75% of mail volume, Ms. Robinson says. In response, the agency is looking into offering rebates for volume growth or discounts for those who use reply envelopes or cards in their mailings.

There’s also a technology story at play. More bill payment and communication is done online, creating a long-term trend away from paper mailing. The Abigail Adams art of letter writing, while not extinct, does seem to be decreasing as email rises.

Then there’s increased competition. Although the Postal Service may dominate in the delivery of letters, when it comes to packages, they compete with the likes of FedEx, UPS and DHL. Still, only a tenth of postal revenue comes from packages, Ms. Robinson says.

The postal service as an agency also faces unique challenges. They’re the only federal agency that’s required to prefund retiree health benefits, due to a congressional mandate. That comes out to about $5.5 billion a year, Ms. Robinson says, out of what was a $68 billion budget in 2009.

On average, the 2011 price increases for classes of mail that are currently significantly short of covering their costs would be 5.6%, with some charges for things like periodicals increasing as much as 8%. All of the increases, including the postage stamp increase would still only make a $2.3 billion dent in the Postal Service’s $7 billion projected deficit. To make up the difference, there’s still some noodling being done on proposals including eliminating mail delivery on Saturdays, among other proposals.

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